David Barnett of DPB Independent Financial Services asks: “Why are companies prepared to write unprofitable business, that is, stakeholder pensions, which, on their own admission, will not become profitable for at least 10 years? Is this not contrary to their obligation to shareholders and with-profits policyholders?” NB: Good point. It is slightly odd that providers are prepared to undertake such an expensive loss-leader exercise? It is part of the mad dash to secure market share they all believe to be so important.
I have been warning against such an approach for the past 18 months. What I fear most of all is that a new international player will enter the market in a few years time at an even lower price and the original stakeholder providers will haemorrhage funds and never recover their costs. Yes, they do have a responsibility to their with-profits members and shareholders but I imagine the appointed actuaries of these providers will have done their number-crunching.
AB: Stakeholder will be profitable in the long term if the business sticks and funds under management increase significantly. Providers will be keen to ensure levels of service and performance are good enough to discourage clients from switching.
Large offices are risking shareholders' and with-profits policyholders' money in the short term and taking calculated business risks (some may say betting) that persistency and business levels allow them to make a long-term profit. This is the nature of insurance business. If they are successful, the risk will be justified. If not, we must hope offices recognise the signs early enough to avoid trouble.
I dare say losses incurred by proprietary offices may largely find their way into with-profits funds. Smaller offices cannot reasonably afford this risk and one or two, such as National Mutual, have commendably declared their intention not to play. Expect to see lots of consolidation over the coming months.
SB: I have no idea why companies would be prepared to write unprofitable business.
NH: A very interesting question and one that taxes most of the fund management industry, I suspect. I am a little surprised at some of the applicants being reviewed by Opra. I was half expecting only to see six to 10 of the big insurers, with a couple of asset managers.
I am not in the least bit surprised by the lack of fund management houses willing to risk their business. Fund managers do not have the same book-keeping luxuries that life companies enjoy where they can assess their current profitability on future earnings.
The Government seemed willing to ignore the commercial aspects when setting the rules and just expected everyone to want to play. In the event, what it has done is to discourage asset managers from joining the party and handed stakeholder to the life companies which, if one believes the propaganda, it was keen not to do.
I do wonder how many of the decision-makers among today's insurers are developing business plans on the basis that they personally will not be around in 10 years time to pick up the pieces.
More than one Government representative has stated publicly that stakeholder providers are not expected to make a profit. I cannot imagine that it is in the public interest to expect them to make a loss. On the other hand, one might suggest cynically that the provisions are another form of wealth distribution – getting shareholders and other investors to meet the costs of less affluent investors.
SR: For major pension players, it is not possible to ignore stakeholder. Do not forget that stakeholder has driven down charges for all forms of money-purchase pension.
The key needs are to achieve scale and processing efficiencies which drive down costs. My own company takes a long-term view of the UK pension market and has invested very heavily in achieving these outcomes.
Nobody can be sure who will be the winning and losing providers in the post-stakeholder world but we believe our preparations, existing market position and financial strength mean we are very well placed to prosper.
Jonathan Holdaway of Julian Fitter Associates asks: “It is my understanding that, if a grandparent contributes £3,600 to a personal pension for a grandchild, then this does not constitute a potentially exempt transfer for inheritance tax purposes. Developing that idea further, if the individual had, say, eight grandchildren, they could then presumably reduce the amount of their estate by £28,800 at a net cost of £22,464? This seems too good to be true and I would be grateful for your confirmation.
NB: Section 3.11 of the Inland Revenue personal pension scheme guidance notes (including stakeholder pension schemes) IR76 2000 states: “If the prospective member is under the age of 18, a contract may only be entered into by the legal guardian.” I imagine that only in a very few cases will the grandparent be the legal guardian although there is no reason why they should not help the grandchild fund the stakeholder pension. Contributions of £3,600 gross or £2,808 net should be inside the annual gift exemption. The others would have to be justified by normal expenditure out of income rules not reducing the donor's estate.
AB: Our understanding is this would not constitute a potentially exempt transfer. The first £3,600 gross falls within £3,000 gift allowance so would be exempt. Others would have to be supported within the grandparent's income. I assume payments are into a stakeholder pension.
SB: For the inheritance tax liabilities to be as described in the question, there would need to be an exclusion made in the regulations to allow for it. I have looked through the regulations and the amendments to the regulations and have found no such exclusion, I am afraid. Good try though.
SR: This is a tricky one. My inheritance tax specialist colleagues refer me to s3A (2) of IHTA 1984. This suggests that the payment referred to would not be a transfer to an individual and, therefore, could not be a potentially exempt transfer, because it did not fall immediately into the child's estate.
Name and address supplied: The area of exit penalties seems very grey. Different life offices appear to be adopting their own interpretations to decide if an existing scheme levies exit penalties or is merely collecting charges they would have collected if the policy had continued.
I asked the companies we deal with for written confirmation on whether they consider the scheme is RU64-compliant in this respect but how can I be certain that Opra will agree with them?
If a scheme is RU64-compliant in respect of the exit penalties but the employer does not want to allow access to all staff after three months (group personal pensions) or one year (occupational schemes), then clearly the scheme is not compliant. Does this mean the new stakeholder scheme must be offered to all staff including those in the current scheme even though what they already have is better than a stakeholder with no employer contribution?
Likewise, if an employer runs a GPP with contributions of less than 3 per cent and does not want to increase contributions, does he have to offer everyone the new stakeholder or just those not in the GPP?
Recently there was an article from an IFA declaring that it is OK to have a group stakeholder scheme on a salary-sacrifice basis. He proclaims that no one else has thought of this clever idea. Well I have considered and abandoned this idea as I thought the Inland Revenue would consider it an abuse of the current rules since all employees would be signing to take a pay cut of identical percentages at the same time. What is the panel's view on this one?
NB: One way round this is not to seek exemption but to designate a stakeholder scheme. Inappropriate marketing suggests designating a scheme is either costly or difficult. There is as yet no compulsion for an employer to contribute to a stakeholder scheme so why not consult, designate, inform and provide salary-deduction facilities and continue with the GPP? With this approach, it does not matter if Opra believes the GPP is exit-penalty-friendly or not.
AB: This is a very grey area. After discussions with various insurers, it looks like the following policies will be acceptable: level-load contracts, front-end load contracts (that is, low initial allocation to accumulation units) provided there are no back-end charges or increased charges for premium suspension, initial unit contracts where the penalty on transfer can be shown to be merely a capitalisation of the initial unit charges that would have applied if premiums had continued.
It is possible that contracts with a loyalty bonus dependent on premiums continuing or funds remaining invested until selected retirement age may cause problems as this could be viewed as an increase in charges on premium suspension. This seems slightly unfair given that initial unit contracts appear to be acceptable.
You cannot be certain Opra will agree with insurers on whether contracts are acceptable (beware of words like “we believe …” and “our interpretation…”) but you should note that certain insurers are amending terms on existing policies to bring them into line with the stakeholder structure.
Even GPPs that Opra considers acceptable may cause problems as a result of RN53 and RU83 since differences will have to be explained to new entrants and you will have to give reasons why you consider this to be at least as good as a stakeholder. This is OK if the employer is adamant they will not contribute to the stakeholder but will they all adopt this attitude?
On access, Misys network's understanding is the employers would have to offer stakeholder to all staff if the scheme were a GPP and the entry condition was more than three months' service or the contributions were under 3 per cent. If the employer's scheme were an occupational scheme, employees eligible to join the scheme within one year do not constitute relevant employees and do not need to be offered a stakeholder.
I imagine salary sacrifice on this scale would cause a problem with the Revenue. You cannot force staff to sacrifice salary so if even one employee did not want to do this you would have to offer stakeholder to all staff.
SB: “Exit penalties” have not been clearly defined. I have no particular insight from Opra but my understanding from discussions with the DSS is that people transferring from the GPP should not be penalised for doing so.
I think what is intended is that people transferring should be treated in the same way as if they opted for paid-up rights within the personal pension. Front-end loading, for example, would be OK on this basis whereas the imposition of a further charge for the specific act of transferring would not.
This is a tricky one because it is really two questions in one and the answers are different.
Taking the GPP first, it must satisfy certain criteria for the members to be judged to be “not relevant” for provision of stakeholder access. One of these is for the GPP to qualify as an acceptable alternative it has to be made available to all relevant employees. If any relevant employee is barred from the GPP, then, even if it meets all the other criteria, then all the members of the GPP are classed as being “relevant” too.
The nonsensical example cited in the question is unfortunately accurate. Such people in “good” GPPs to which the employer contributes are not regarded by this legislation as being in an “acceptable alternative” to a stakeholder pension to which the employer does not contribute and the law says they must be offered membership of a stakeholder scheme.
The second question implicit in this refers to occupational schemes and the 12-month waiting period. The situation here is different and the answer is the opposite.
All members of occupational schemes are always regarded as being “not relevant”, irrespective of what happens to other relevant employees. So, an employer with an occupational scheme to which he contributes 2 per cent of payroll for some staff and a GPP to which he contributes 3 per cent of payroll for some other staff but with other relevant employees who are not offered membership of either the occupational scheme or the GPP, would be legally required to provide stakeholder access for the GPP members but not for the OPS members. It is all part of the common-sense approach being applied to pensions at last.
All relevant employees would need to be offered stakeholder access. One of the criteria to be met for a GPP to be classed as an acceptable alternative to the provision of stakeholder access is that the employer is prepared to contribute at least 3 per cent of basic pay. If the GPP does not meet all the criteria then its members are “relevant” too.
I have never been a fan of salary sacrifice. Problems arise where such arrangements are described as providing or are understood to provide pension benefits for free – out of the ether, so to speak.
People giving up salary are also giving up other valuable benefits. It is important the losses are weighed carefully against the gains in NI savings that are achieved and, crucially, that every member of the GPP (which is what a stakeholder scheme is) understand this, agree with the approach and are advised it is in their best interest to join on this basis. This can be quite a risk.
SR: My understanding is that Opra is not planning to issue detailed rules on employer exemption issues. If an employer is in any doubt on whether the GPP meets the exit penalty rules, the IFA should get a certificate from the GPP provider. If there is later any query, the employer will, at the very least, be able to demonstrate that reasonable steps had been taken to comply with the legislation.
My understanding of the DSS position is that if an exempting GPP is not offered to all relevant employees, then stakeholder must be offered to all, not just the ones who are not offered the GPP. In contrast, an employee who has ever been offered an occupational scheme does not have to be offered stakeholder, regardless of what is being offered to other employees. It follows that a non-exempting GPP will not affect the number of employees who must be offered stakeholder.
On salary sacrifice under stakeholder, I do not really understand what is new. It is the concept of salary sacrifice which is or is not relevant between an employer and employee, not the pension vehicle used to carry it out.
Money Marketing has brought together a panel of technical, regulatory, marketing and advisory experts to answer IFAs' pension questions as stakeholder launches.
Our panel will aim to address issues on stakeholder, individual pension accounts, personal pensions and other changes such as the ending of carry-forward and the switch to a new tax regime for defined-contribution plans from April.
We invite IFAs to send their questions to the panel. We will print questions and the panel's answers over the next few weeks. Email questions to firstname.lastname@example.org or send them to Helen Monks, Money Marketing, 50 Poland Street, London, W1T 3QN.